Optimism for Recovery Makes Commodities Big Winners

Risk assets in favor again.

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Technical Relevance

Stocks edged higher on light volume, making it that much more likely the stock indexes will end the year above critical monthly closing resistance levels. Bonds lost more ground Monday and the yield on the benchmark 10-year Treasury moved up to the first possible Fibonacci projection level at 3.854% (Monday's peak was 3.85%).

Commodities were the big winners Monday as risk assets were in favor again amid optimism for the global economic recovery and the US dollar's week-long pause. The Power Shares DB Commodity Index Tracking Fund (DBC) -- a good proxy for the broad commodities complex -- was up 1.77%, closing at its highest since December 4. The DBC still has work to do to conquer its stiff resistance at $25.

The US Dollar Index closed modestly lower yesterday, but it remains well within its one-week range of 77.50 to 78.50 and maintains an overall short-term bullish posture as it pauses.

Market Internals: NASDAQ (Figures are rounded)

Critical Market Components

S&P 500: Near-term resistance for the S&P remains 1139 (convergence of Fibonacci levels) with possible upside to around 1145 in the near term. Short-term support is the breakout point of 1119 with more substantial support coming in at the 75-day moving average of 1081.74.

NASDAQ: 2271.48 on a monthly close is the number to watch for the NASDAQ and the market as far as I'm concerned. Any close Thursday above that forces me to change my cautious stance on the NASDAQ and the market in general. The 61.8% retracement (using the daily extremes) of the October 2007 to the March 2009 range comes in just above Monday's close at 2292.68. Support below that level is the recent breakout point at 2212.49.

Dow Jones Industrials: The Dow closed Monday a mere 40 points above its previous weekly closing resistance at 10,507 (now first support); the bulls should hope to see the index put some more space between itself and that level in the very near term; the next resistance is horizontal band at 10,700 to 10,900. The Dow has closed between 10,200 and 10,900 in five of the last nine years. Will it be six for 10 this decade?

10-Year US Treasury Yield: Rates on the two-year Treasury note were pressured higher Monday by poor results from yesterday's auction; benchmark 10-year rates moved higher as well, but failed to close above initial resistance of 3.85% (the wave iii of five target); support remains at the horizontal line at 3.603% (12/15 close).

Commodity ETF (DBC): The DBC moved closer to major resistance at 25 Monday; minor support exists at $24.18 with more support below that at the 80-day moving average at 23.45.

US Dollar Index (DXY): Short-term support of 77.47 held up Monday (although it wasn't actually touched); short-term resistance (horizontal line created by June's closing low) of 78.44 was touched last Tuesday; DXY has been range bound for a week now; the intermediate-term target is the 81-83 area.

Semiconductor Index (SOX): The target on the upside for the SOX is 366.52 (Fibonacci projection) with a max upside of 384.28 (bottom of first wave lower from July 21, 2006); the SOX pulled back Monday, but held above its minor horizontal line support at 357 (from June 2003 and September 2004 lows); more substantial horizontal line support exists at 332.11.

Crude Oil: Crude closed above its short-term Fibonacci projection target at 78.35 -- that now becomes support; $80 appears to be the next resistance area.

Gold: Gold has failed thus far to re-take its broken uptrend line resistance -- that level comes in at around 1115; the major support for gold remains down at my target of 1045 (the 50% retracement of the recent wave iii of three up move); the next resistance higher is at 1142.90 (horizontal line at 12/17 high).

Continuing with yesterday's long-term view of the equity markets, I'm showing a monthly NASDAQ chart going back to 1997. With the previously-mentioned and all-important 2271.48 monthly closing level seemingly more likely to be eclipsed this Thursday, it becomes necessary to identify other possible resistance levels and new likely scenarios.

First, 2292.68 represents the 61.80% Fibonacci retracement level of the down move that occurred from October 2007 to March 2009. That level is merely a point and a half above Monday's close and is worth monitoring as the week progresses.

Second, the NASDAQ has nearly 10% more upside to its next resistance level at 2522.66 (horizontal line resistance -- see three highlighted circles in chart lying along this line).

Finally, beyond the 2522.66 level, the next target is at 2861.51 (again horizontal line resistance and also representing the 100% retracement level of the down move from October '07 to March '09). That's 25% above yesterday's close! If 2271.48 is in fact eclipsed at Thursday's close, it's not hard for me to imagine the NASDAQ going on an explosive run to either of the next two upside targets in a hurry.

Strategy: A close above 2271.48 on Thursday will have very bullish ramifications for the NASDAQ and the broader market. Be prepared to increase exposure to the NASDAQ and specifically technology if 2271.48 is taken out on Thursday's close.

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